UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
For
the fiscal year ended October 31, 2023
For
the transition period from ____________ to _______________.
Commission
file number: 001-32491
COFFEE
HOLDING CO., INC.
(Exact
name of registrant as specified in its charter)
3475 Victory Boulevard, Staten Island, New York 10314
(Address of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (718)832-0800
Securities
registered under Section 12(b) of the Act:
Title of each class: Trading Symbol Name of each exchange on which registered:
Common Stock, Par Value $0.001 Per Share JVA NASDAQ Capital Market
Securities
registered under Section 12(g) of the Exchange Act: None
Indicate
by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Emerging
Growth Company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☒
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The
aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the closing price of the
registrant’s common stock on the NASDAQ Capital Market on April 30, 2023, was $7,972,813.
As
of January 20, 2024, the registrant had 5,708,599 shares of common stock, par value $0.001 per share, outstanding.
Documents
incorporated by reference
None.
TABLE
OF CONTENTS
Page
PART I 1
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 11
ITEM 1B. UNRESOLVED STAFF COMMENTS 22
ITEM 1C. CYBERSECURITY 22
ITEM 2. PROPERTIES 22
ITEM 3. LEGAL PROCEEDINGS 23
ITEM 4. MINE SAFETY DISCLOSURES 23
ITEM 6. RESERVED 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9A. CONTROLS AND PROCEDURES 30
ITEM 9B. OTHER INFORMATION 30
ITEM 9C. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 30
PART III 31
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 31
ITEM 11. EXECUTIVE COMPENSATION 34
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 41
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 42
SIGNATURES 46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
i
PART
I
ITEM 1. BUSINESS
General
Overview
Products
and Operations. We are an integrated wholesale coffee roaster and dealer located in the United States. Our core products can
be divided into three categories:
Our
private label and branded coffee products are sold throughout the United States and certain countries in Asia to supermarkets, wholesalers,
and individually owned and multi-unit retail customers. Our unprocessed green coffee, which includes over 90 specialty coffee offerings,
is primarily sold to specialty gourmet roasters in the United States, Canada and multiple international countries.
We
conduct our operations in accordance with strict freshness and quality standards. All of our private label and branded coffees are produced
from high quality coffee beans that are deep roasted for full flavor using a slow roasting process that has been perfected utilizing
almost 50 years of experience in the coffee industry. In order to ensure freshness, our products are delivered to our customers within
72 hours of roasting. We believe that our long history has enabled us to develop a loyal customer base.
In
June 2016, we acquired substantially all of the assets of Coffee Kinetics LLC (doing business as Sonofresco) through our wholly-owned
subsidiary Sonofresco, LLC (“Sonofresco” or “SONO”), including equipment, inventory, customer lists, relationships
and accounts payable. In addition to our wholesale green coffee, private label coffee and branded coffee product offerings, we currently
sell tabletop coffee roasting equipment to our customers through Sonofresco.
On
February 23, 2017, we purchased all the outstanding common stock of Comfort Foods, Inc. (“CFI”). CFI is a medium sized regional
roaster, manufacturing both branded and private label coffee for retail and foodservice customers located predominantly in the northeast
United States marketplace.
On
April 24, 2018, pursuant to an Asset Purchase Agreement, by and among Generations Coffee Company, LLC (“GCC”) the entity
formed as a result of the Company’s joint venture with Caruso’s Coffee, Inc. and Steep & Brew, Inc. (“the Seller”)
a Wisconsin corporation and the stockholder of the Seller. GCC purchased substantially all the assets, including equipment, inventory,
customer lists and relationships of the Seller. As of the fiscal period ended January 31, 2022, the parties to the joint venture have
agreed not continue with this joint venture.
On
October 15, 2020, we entered into a Contribution and Equity Purchase Agreement (the “Jordre Well Agreement”) to become a
49% owner in The Jordre Well, LLC (“The Jordre Well”), a cannabidiol (“CBD”) beverage company. Under the terms
of the Jordre Well Agreement, The Jordre Well was to assist us in the development and commercialization of CBD-infused line extensions
for non-coffee CBD-infused beverages and products. However, after further analysis by management, we will no longer pursue this line
of products.
We
were incorporated on October 9, 1995 under the laws of the State of Nevada under the name Transpacific International Group Corp (“Transpacific”).
On April 16, 1998, Transpacific completed a merger with Coffee Holding Co., Inc., a New York corporation. Upon the consummation of the
merger, Coffee Holding Co., Inc. was merged into Transpacific and Transpacific changed its name to Coffee Holding Co., Inc.
Our
corporate offices are located at 3475 Victory Boulevard, Staten Island, New York 10314. Our telephone number is (718) 832-0800 and our
website address is www.coffeeholding.com. On our website, investors can obtain, free of charge, a copy of our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Code of Conduct and Business Ethics, including disclosure related to
any amendments or waivers thereto, other reports and any amendments thereto filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act of 1934, as amended, as soon as reasonably practicable after we file such material electronically with, or furnish it
to, the Securities and Exchange Commission, or the SEC. None of the information posted on our website is incorporated by reference into
this Annual Report. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding us and other companies that file materials with the SEC electronically
All
references in this report to “JVA,” the “Company,” “we,” “us,” or “our” mean
Coffee Holding Co., Inc. and its subsidiaries unless stated otherwise or the context otherwise indicates.
Recent
Developments
On
September 29, 2022, Coffee Holding Co., Inc, a Nevada corporation (“JVA”), entered into a Merger and Share Exchange Agreement
(the “Merger Agreement”), by and among JVA, Delta Corp Holdings Limited, a Cayman Islands exempted company (“Pubco”),
Delta Corp Holdings Limited, a company incorporated in England and Wales (“Delta”), CHC Merger Sub Inc., a Nevada corporation
and wholly owned subsidiary of Pubco (“Merger Sub”), and each of the holders of ordinary shares of Delta as named therein
(the “Sellers”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with
and into JVA, with JVA surviving as a direct, wholly-owned subsidiary of Pubco (the “Merger”). On June 29, 2023, JVA, Pubco,
Delta, Merger Sub and the Sellers entered into Amendment 1 to the Merger Agreement (the “First Amendment”). On January 4,
2024, JVA, Pubco, Delta, Merger Sub and the Sellers entered into Amendment 2 to the Merger Agreement (the “Second Amendment”).
As
a result of the Merger, each issued and outstanding share of JVA common stock, $0.001 par value per share (the “JVA Common Stock”),
will be cancelled and converted for the right of the holder thereof to receive one ordinary share, par value $0.0001 of Pubco (the “Pubco
Ordinary Shares”).
As
a condition to the Merger, Pubco shall also acquire all of the issued and outstanding Delta securities from the Sellers in exchange for
Pubco Ordinary Shares (the “Exchange” and, collectively with the Merger and the other transactions contemplated by the Merger
Agreement, the “Transactions”). As a result of the Transactions, JVA and Delta will each become direct, wholly-owned subsidiaries
of Pubco, with JVA stockholders receiving approximately $31.5 million (or 4.79%) worth of Pubco Ordinary Shares (the “Merger Consideration”)
and Delta stockholders receiving approximately $625 million (or 95.21%) worth of Pubco Ordinary Shares (the “Exchange Consideration”
and collectively with the Merger Consideration, the “Business Combination Consideration”), subject to certain adjustments,
at an implied diluted value per share of $5.50. The Business Combination Consideration may be adjusted if Delta closes certain acquisitions
prior to the closing of the Transactions. The Merger Agreement also includes an earn-out to existing stockholders of Delta, consisting
of $50 million of additional Pubco Ordinary Shares, which will be released to Delta stockholders if and when Delta achieves $70 million
or greater of net income for fiscal year ending 2023.
At
the effective time of the Merger (the “Merger Effective Time”), each award of options to purchase JVA Common Stock (each,
a “JVA Stock Option”) that is outstanding, whether vested or unvested, will be cancelled and substituted with option(s) to
purchase Pubco Ordinary Shares to be granted under the Pubco equity plan (the “Substituted Options”). The Substituted Options
will represent the right to purchase that number of shares of Pubco Ordinary Shares equal to the number of shares of JVA Common Stock
underlying such JVA Stock Option immediately prior to the Merger Effective Time with a per-share exercise price of such Substituted Option
equal to the exercise price per JVA Common Stock subject to such JVA Stock Option immediately prior to the Merger Effective Time.
Prior
to execution of the Merger Agreement, JVA’s board of directors (the “Board”) unanimously (i) determined that the terms
and provisions of the Merger Agreement and the transactions contemplated therein, including the Merger and Transactions, are fair, advisable
to and in the best interests of JVA and its stockholders, (ii) approved the Merger Agreement and related Transactions, (iii) directed
that the adoption of the Merger Agreement be submitted to a vote at a meeting of the stockholders of JVA, and (iv) resolved to recommend
that JVA’s stockholders adopt the Merger Agreement.
JVA,
Pubco, Delta and the Sellers have made customary representations and warranties in the Merger Agreement and have agreed to customary
covenants regarding the operation of their respective businesses prior to the closing of the transactions contemplated thereby. Consummation
of the Merger is subject to customary closing conditions, including, without limitation, (i) approval of the Merger Agreement and the
transactions contemplated thereunder by a majority of JVA’s stockholders (the “JVA Stockholder Approval”), (ii) the
absence of any law or order that prevents or prohibits the consummation of the Transaction, (iii) obtaining all requisite governmental
authorizations, (iv) effectiveness of the Registration Statement of Pubco on Form F-4, and (v) approval of the listing of Pubco Ordinary
Shares on the Nasdaq Capital Market.
From
the date of the Merger Agreement until October 19, 2022 (the “Go-Shop Period”), JVA had the right to initiate, solicit, facilitate
and encourage any inquiry or the making of any proposals or offers that would constitute an acquisition proposal involving more than
fifteen percent (15%) of JVA’s assets or outstanding shares of common stock or in which the stockholders of JVA immediately preceding
the contemplated transaction would hold less than eighty-five percent (85%) of the voting equity interest of the surviving company (each
or any combination of the foregoing, a “Takeover Proposal”), including by way of providing access to non–public information
to any third party pursuant to a non-disclosure agreement. Following the expiration of the Go-Shop Period, JVA ceased such activities
and be subject to customary “no-shop” restrictions on its ability to solicit a Takeover Proposal from third parties and to
provide non-public information to and engage in discussions with a third party in relation to a Takeover Proposal, except that JVA may
continue to engage in the aforementioned activities with third parties from whom JVA has received a Takeover Proposal that the Board
has determined constitutes or is reasonably likely to lead to a Superior Proposal (as defined below) and has determined that the failure
to take such actions would be inconsistent with the Board’s fiduciary duties.
Prior
to obtaining JVA Stockholder Approval, the Board may change its recommendation that stockholders vote to adopt the Merger Agreement (a
“Change in Recommendation”) (i) in response to any material event or change in circumstances with respect to JVA that was
not actually known or reasonably foreseeable by JVA prior to the date of the Merger Agreement (an “Intervening Event”) that
the Board determines in good faith (after consultation with its financial advisor and outside legal counsel) that the failure to change
its recommendation in such circumstances would be reasonably likely to violate its fiduciary duties to the stockholders of JVA under
applicable law or (ii) if JVA has received a Takeover Proposal involving more than fifty percent (50%) of JVA’s assets or outstanding
shares of common stock or in which the stockholders of JVA immediately preceding the contemplated transaction would hold less than fifty
percent (50%) of the voting equity interest of the surviving company, that the Board determines in good faith (after consultation with
its financial advisor and outside legal counsel) is reasonably likely to be consummated in accordance with its terms and, among other
things, if consummated, would be more favorable from a financial point of view to JVA’s stockholders than the Transactions (a “Superior
Proposal”) (in which case JVA may also terminate the Merger Agreement to enter into such Superior Proposal, subject to certain
conditions including payment of the JVA Termination Fee, as described below).
Before
the Board may change its recommendation in connection with an Intervening Event or a Superior Proposal, or terminate the Merger Agreement
to accept a Superior Proposal, JVA must provide Delta prompt written notice of its decision to make a Change in Recommendation and for
at least five (5) business days after such notice, JVA will negotiate with Delta to enable Delta to revise the terms of the Merger Agreement
so that the Takeover Proposal no longer constitutes a Superior Proposal. Each time modifications to any material term of such alternative
acquisition proposal determined to be a Superior Proposal are made, JVA must notify Pubco of such modification and such five (5) business
day period will recommence.
The
Merger Agreement may be terminated by each of Delta and of JVA under certain circumstances, including, among others by either Delta or
JVA if the Merger has not been consummated by April 1, 2024 (the “Outside Date”). If the Merger Agreement is terminated under
certain circumstances, including, among others, as a result of breach by either JVA or Delta of their respective representations, warranties
or covenants in the Merger Agreement, whereby JVA or Delta, respectively, may be entitled to a termination fee in the amount of $750,000
plus disbursements of all documented, out-of-pocket expenses up to $250,000. In addition, if JVA terminates the Merger Agreement to accept
a Takeover Proposal or the Board (i) adversely changes its recommendation to the stockholders of JVA regarding the adoption of the Merger
Agreement or (ii) supports the approval of any JVA Takeover Proposal, then Delta shall be entitled to a termination fee of $1.3 million
and plus a disbursement of reasonable expenses up to $2 million (the “JVA Termination Fee”).
The
equityholders of Delta and JVA will have certain customary registration rights with respect to the Pubco Ordinary Shares to be received
in the transaction pursuant to the terms of a registration rights agreement, dated September 29, 2022 (the “Registration Rights
Agreement”).
On
September 29, 2022, concurrently with the entry into the Merger Agreement, Delta, Pubco and JVA entered into Voting and Support Agreements
(the “JVA Voting Agreement”) with Andrew Gordon, President and Chief Executive Officer of JVA, and David Gordon, Executive
Vice President and Chief Operating Officer of JVA, pursuant to which Messrs. Gordon have agreed to vote in favor of adopting the Merger
Agreement and the related transactions as contemplated thereunder. JVA Voting Agreements will terminate upon the earliest to occur of
(i) the mutual written consent of each of Delta, Pubco, JVA and Messrs. Gordon, (ii) the Merger Effective Time, and (iii) the date of
termination of the Merger Agreement in accordance with its terms.
The
foregoing description of the Merger Agreement, the Registration Rights Agreement and JVA Voting Agreements does not purport to be complete
and is qualified in its entirety by reference to the full text of (i) the Merger Agreement, (ii) the Registration Rights Agreement, and
(iii) the form of Voting and Support Agreement, copies of which are filed as exhibits to this Annual Report on Form 10-K and incorporated
by reference herein.
Our
Competitive Strengths
To
achieve our growth objectives described below, we intend to leverage the following competitive strengths:
Positioned
to Profitably Grow Through Varying Cycles of the Coffee Market. We believe that we are one of the few coffee companies to offer
a broad array of branded and private label roasted ground coffees and wholesale green coffee across the spectrum of consumer tastes,
preferences and price points. While many of our competitors engage in distinct segments of the coffee business, we sell products in each
of the following areas:
● Retail branded coffee;
● Mainstream retail private label coffee;
● Specialty retail coffees both private label and branded;
● Wholesale specialty green and gourmet whole bean coffees;
● Single cup coffee pods;
● Food service;
● Instant coffees;
● Tea; and
● Tabletop coffee roasting equipment.
Our
branded and private label roasted ground coffees are sold at competitive and value price levels while some of our other branded and specialty
coffees are sold predominantly at premium price levels. Premium price level coffee is high-quality gourmet coffee, such as AA Arabica
coffee, which sell at a substantial premium over traditional retail canned coffee, while competitive and value price level coffee is
mainstream or traditional canned coffee. Because of this diversification, we believe that our profitability is not dependent on any one
area of the coffee industry and, therefore, is less sensitive than our competition to potential coffee commodity price and overall economic
volatility.
Wholesale
Green Coffee Market Presence. As a large roaster-dealer of green coffee, we believe that we are favorably positioned to increase
our specialty coffee sales. Since 1998, we have increased the number of our wholesale green coffee customers, including coffee houses,
single store operators, mall coffee stores and mail order sellers. We are a charter member of the Specialty Coffee Association of America
and one of the largest distributors of Swiss Water Processed Decaffeinated Coffees and Dattera specialty Brazil coffees in the United
States. Our almost 50 years of experience as a roaster and a dealer of green coffee allows us to provide our roasting experience as a
value added service to our gourmet roaster customers. The assistance we provide to our customers includes training, coffee blending and
market identification. We believe that our relationships with wholesale green coffee customers and our focus on selling green coffee
as a wholesaler has enabled us to participate in the growth of the specialty coffee market while mitigating the risks associated with
the competitive retail specialty coffee environment.
Diverse
Portfolio of Differentiated Branded Coffees. We have amassed a portfolio of eight proprietary name brands sold to supermarkets,
wholesalers and individually owned stores in the United States, including brands for specialty espresso, Latin espresso, Italian espresso,
100% Colombian coffee and blended and flavored coffees. In addition, we have entered into a licensing agreement with Del Monte Corporation
for the exclusive right to use the S&W trademark in the United States and other countries approved by Del Monte Corporation in connection
with the production, manufacture and sale of roasted whole bean and ground coffee for distribution to retail customers. Our existing
portfolio of differentiated brands combined with our management expertise serve as a platform to add additional name brands through acquisition
or licensing agreements which target product niches and segments that do not compete with our existing brands.
Management
Has Extensive Experience in the Coffee Industry. Andrew Gordon, our President, Chief Executive Officer, Chief Financial Officer
and Treasurer, and David Gordon, our Executive Vice President – Operations, have worked with Coffee Holding for 42 and 44 years,
respectively. During this period, the Company has successfully navigated varying cycles in both the coffee industry and macro economy.
David Gordon is an original member of the Specialty Coffee Association of America. We believe that our employees and management are dedicated
to our vision and mission, which is to produce high quality products, as well as to provide quality and responsive service to our customers.
Our
Growth Strategy
We
believe that significant growth opportunities exist by selectively pursuing strategic acquisitions and alliances, increasing penetration
with existing customers by adding new products, and developing our Harmony Bay brand and increase the number of our wholesale green coffee
customers. By capitalizing on this strategy, we hope to continue to grow our business with our commitment to quality and personalized
service to our customers. We do not intend to compete on price alone nor do we intend to expand sales at the expense of profitability.
Selectively
Pursue Strategic Acquisitions and Alliances. We have expanded our operations by acquiring coffee companies, entering into strategic
alliances and acquiring or licensing brands, which complement our business objectives and we intend to continue to seek such opportunities.
Grow
Our Cafe Caribe and Cafe Supremo Products. We believe the Latin population in the United States is the fastest growing and now
represents the largest minority demographic in the United States. We believe there is significant opportunity for our Café Caribe
and Café Supremo brands to gain market share among Latin consumers in the United States. Café Caribe, which has historically
been our leading brand by poundage, is a specialty espresso coffee that targets espresso coffee drinkers and, in particular, Latin consumers.
Café Supremo is a specialty espresso coffee which is priced for the more price sensitive Latin espresso coffee drinker.
Further
Market Penetration of Our Niche Products. We intend to capture additional market share through our existing distribution channels
by selectively adding or introducing new brand names and products across multiple price points, including:
● New licensing agreements;
● Specialty blends and foodservice opportunities; and
● Sales of our tabletop coffee roasting equipment.
Our
Core Products
Our
core products can be divided into three categories:
Wholesale
Green Coffee. The specialty coffee market remains the fastest growing area of our industry. The number of gourmet coffee houses
have been increasing in all areas of the United States. The growth in specialty coffee sales has created a marketplace for higher quality
and differentiated products, which can be priced at a premium in the marketplace. As a large roaster-dealer of green coffee, we are favorably
positioned to increase our specialty coffee sales. We sell green coffee beans to small roasters and coffee shop operators located throughout
the United States and carry over approximately 90 different varieties. Specialty green coffee beans are sold unroasted, direct from warehouses
to small roasters and gourmet coffee shop operators, which then roast the beans themselves. We sell from as little as one bag (132 pounds)
to a full truckload (44,000 pounds) of specialty green coffee beans, depending on the size and need of the customer. We believe that
we can increase sales of wholesale green coffee without an increase in infrastructure as well as without venturing into the highly competitive
retail specialty coffee environment. We believe that by utilizing our current strategy we can be as profitable or more profitable than
our competitors in this segment by selling “one bag at a time” rather than “one cup at a time.”
Private
Label Coffee. We roast, blend, package and sell coffee under private labels for companies throughout the United States and Canada.
Our private label coffee is sold in cans, brick packages and instants in a variety of sizes. We produce private label coffee for customers
who desire to sell coffee under their own name but do not want to engage in the manufacturing process. Our private label customers seek
a quality similar to the national brands at a lower cost, which represents a better value for the consumer.
Branded
Coffee. We roast and blend our branded coffee according to our own recipes and package the coffee at our facilities in La Junta,
Colorado, and North Andover, Massachusetts. We then sell the packaged coffee under our brand labels to supermarkets, wholesalers and
individually-owned stores throughout the United States.
We
hold trademarks for each of our proprietary name brands and have the exclusive right to use the S&W, IL CLASSICO brand names in the
United States in connection with the production, manufacture and sale of roasted whole bean and ground coffee for distribution at the
retail level. For further information regarding our trademark rights, see “Business—Trademarks.”
Each
of our name brands is directed at a particular segment of the coffee market. Our branded coffees are:
Cafe
Caribe, a specialty espresso coffee that targets espresso coffee drinkers and, in particular, the Latin consumer market;
Don
Manuel, is produced from the finest 100% Colombian coffee beans. Don Manuel is an upscale quality product which commands a substantial
premium compared to the more traditional brown coffee blends. We also use this known trademark in our food service business because of
the high brand quality;
S&W,
an upscale canned coffee established in 1921 and includes Premium, Premium Decaf, French Roast, Colombian, Colombian Decaf, Swiss Water
Decaf, Kona, Mellow’d Roast and IL CLASSICO lines;
Cafe
Supremo, a specialty espresso that targets espresso drinkers of all backgrounds and tastes. It is designed to introduce coffee
drinkers to the tastes of dark roasted coffee;
Via
Roma, an Italian espresso targeted at the more traditional espresso drinker;
Premier
Roasters, a line of high quality retail and foodservice products packed in composite cans and poly bags and single serve; and
Harmony
Bay, an upscale line of flavored beans in 11oz and 40oz bags, along with single serve offerings in a multitude of unique flavor
profiles.
Other
Products
We
also offer several niche products, including:
● tea; and
● table-top coffee roasters and grinders.
Raw
Materials
Coffee
is a commodity traded on the Commodities and Futures Exchange subject to price fluctuations. Over the past five years, the average price
per pound of coffee beans ranged from approximately $0.8635 to $2.6045. The price for coffee beans on the commodities market as of October
31, 2023 and 2022 was $1.6730 and $1.7770 per pound, respectively. Specialty green coffee, unlike most coffee, is not tied directly to
the commodities cash markets. Instead, it tends to trade on a negotiated basis at a substantial premium over commodity coffee pricing,
depending on the origin, supply and demand at the time of purchase. We are a licensed Fair Trade dealer for Fair Trade certified coffee.
Fair Trade certified coffee helps small coffee farmers to increase their incomes and improve the prospects of their communities and families
by guaranteeing farmers a minimum price of ten cents above the current market price. Our North Andover plant operated by our Comfort
Foods division, is certified organic by the Organic Crop Improvement Association (OCIA). All of our specialty green coffees, as well
as all of the other coffees we import for roasting, are subject to multiple levels of quality control.
We
purchase our green coffee from dealers located primarily within the United States. The dealers supply us with coffee beans from many
countries, including Colombia, Mexico, Kenya, Indonesia, Brazil and Uganda. We do not have any formalized, material agreements or long-term
contracts with any of these suppliers. Rather, our purchases are typically made pursuant to individual purchase orders. We do not believe
that the loss of any one supplier would have a material adverse effect on our operations due to the availability of alternate suppliers.
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Supply
and price can be affected by factors such as weather, politics, currency fluctuations and economics within the countries that export
coffee. Increases in the cost of coffee beans can, to a certain extent, be passed on to our customers in the form of higher prices for
coffee beans and processed coffee. Drastic or prolonged increases in coffee prices may also adversely impact our business as it could
lead to a decline in overall consumption of coffee. Similarly, rapid decreases in the cost of coffee beans may force us to lower our
sale prices before realizing cost reductions in our purchases.
We
subject all of our private unroasted green coffee to both a pre-shipment sample approval and an additional sample approval upon arrival
into the United States. Once the arrival sample is approved, we then bring the coffee to one of our facilities to roast and blend according
to our own strict specifications. During the roasting and blending process, samples are pulled off the production line and tested on
an hourly basis to ensure that each batch roasted is consistent with the others and meets the strict quality standards demanded by our
customers and us.
Our
Use of Derivatives
The
supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond our control. Historically,
we have used, and intend to continue to use in a limited capacity, short-term coffee futures and options contracts primarily for the
purpose of partially hedging the effects of changing green coffee prices and to reduce our costs of sales. In addition, we acquired,
and expect to continue to acquire, futures contracts with longer terms, generally three to four months, primarily for the purpose of
guaranteeing an adequate supply of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected
in our cost of sales. Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts increase
our cost of sales. The use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices.
We believe that, in normal economic times, our hedging policies remain a vital element of our business
model not only in controlling our cost of sales, but also giving us the flexibility to obtain the inventory necessary to continue to
grow our sales while trying to minimize margin compression during a time of high coffee prices. However, no strategy can entirely
eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly in a short period
of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties in any one of our
physical contracts. Although we have had net gains on options and futures contracts in the past,
we have incurred significant losses on options and futures contracts during some reporting periods. In these cases, our cost of sales
has increased, resulting in a decrease in our profitability or increase our losses. Such losses have and could in the future materially
increase our cost of sales and materially decrease our profitability and adversely affect our stock price. See “Item 1A –
Risk Factors - If our hedging policy is not effective, we may not be able to control our coffee costs, we may be forced to pay greater
than market value for green coffee and our profitability may be reduced.” Failure to properly design and implement an effective
hedging strategy may materially adversely affect our business and operating results. If the hedges that we enter do not adequately offset
the risks of coffee bean price volatility or our hedges result in losses, our cost of sales may increase, resulting in a decrease in
profitability or increased losses. As previously announced, as a result of the volatile nature of the commodities markets, we have and
are continuing to scale back our use of hedging and short-term trading of coffee futures and options contracts, and intend to continue
to use these practices in a limited capacity going forward. See “Quantitative and Qualitative Disclosures About Market Risk—Commodity
Price Risks.”
Trademarks
and Tradename
We
hold trademarks, registered with the United States Patent and Trademark Office, for all eight of our proprietary coffee brands and an
exclusive license for S&W, IL CLASSICO brands for sale in the United States. Trademark registrations are subject to periodic renewal
and we anticipate maintaining our registrations. We believe that our brands are recognizable in the marketplace and that brand recognition
is important to the success of our branded coffee business.
Customers
We
sell our private label and our branded coffee to some of the largest retail and wholesale customers in the United States.
Although
our agreements with wholesale customers generally contain only pricing terms, our contracts with certain customers also contain minimum
and maximum purchase obligations at fixed prices. Because our profits on a fixed-price contract could decline if coffee prices increased,
we acquire futures contracts with longer terms (generally three to four months) primarily for the purpose of guaranteeing an adequate
supply of green coffee at favorable prices. Although the use of these derivative financial instruments has generally enabled us to mitigate
the effect of changing prices, no strategy can entirely eliminate pricing risks or increased losses and we generally remain exposed to
losses on futures contracts when prices decline significantly in a short period of time, and we would generally remain exposed to supply
risk in the event of non-performance by the counterparties to any futures contracts. See “Our Use of Derivatives.”
Marketing
We
market our private label and wholesale coffee through trade shows, industry publications, face-to-face contact and through the use of
our internal sales force and non-exclusive independent food and beverage sales brokers. We also use our web site (www.coffeeholding.com)
as a method of marketing our coffee products and ourselves.
For
our private label and branded coffees, we will, from time to time in conjunction with retailers and with wholesalers, conduct in-store
promotions, such as product demonstrations, coupons, price reductions, two-for-one sales and new product launches to capture changing
consumer taste preferences for upscale canned, bagged and single cup coffees.
We
evaluate opportunities for growth consistent with our business objectives. In addition, we have established relationships with independent
sales brokers to market our products across the United States, in areas of the country where we have not had a high penetration of sales
and Canada. We utilize our in-house sales personnel to market our private label brands. We intend to capture additional market share
in our existing distribution channels by selectively adding or introducing new brand names and products across multiple price points,
including niche specialty blends, private label “value” blends and tea and our own brands, filter packages and peripheral
products.
Charitable
Activities
We
are also a supporter of several coffee-oriented charitable organizations and during fiscal years 2023 and 2022, we donated approximately
$24,000 and $38,000, respectively, to charities.
Competition
The
coffee market is highly competitive. We compete in the following areas:
Wholesale
Green Coffee. There are many green coffee dealers throughout the United States. Many of these dealers have greater financial
resources than we do. However, we believe that we have both the knowledge and the capability to assist small specialty gourmet coffee
roasters with developing and growing their businesses. Our over 40 years of experience as a roaster and a dealer of green coffee allows
us to provide our roasting experience as a value added service to our gourmet roaster customers. While other coffee merchants may be
able to offer lower prices for coffee beans, we market ourselves as a value-added supplier to small roasters, with the ability to help
them market their specialty coffee products and develop a customer base. The assistance we provide our customers includes training, coffee
blending and market identification. Because specialty green coffee beans are sold unroasted to small coffee shops and roasters that market
their products to local gourmet customers, we do not believe that our specialty green coffee customers compete with our private label
or branded coffee lines of business. We believe that the addition of Organic Products Trading Company, LLC (“OPTCO”), Sonofresco,
CFI as well as our external green coffee salespeople allows us to compete more effectively throughout the country and Canada.
Private
Label Competition. There are several major producers of coffee for private label sales in the United States. Many other companies
produce coffee for sale on a regional basis. Our main competitor is the Massimo Zanetti Beverage Company. The Massimo Zanetti Beverage
Company is larger and has more financial and other resources than we do and, therefore, is able to devote more resources to product development
and marketing. We believe that we remain competitive by providing a higher level of quality and customer service. This service includes
ensuring that the coffee produced for each label maintains a consistent taste and is delivered on time and in the proper quantities.
Branded
Competition. Our proprietary brand coffees compete with many other brands that are sold in supermarkets and specialty stores,
primarily in the Northeastern United States. The branded coffee market in both the Northeast and elsewhere is dominated by two large
companies: Kraft Foods, Inc. (owner of the Maxwell House brand), and J.M. Smucker Co. (owner of the Folgers and Café Bustelo brands).
Our large competitors have greater access to capital and a greater ability to conduct marketing and promotions. We believe that, while
our competitors’ brands may be more nationally recognizable, our Café Caribe and Café Supremo brands are competitive
in the fast growing Latin demographic, our Harmony Bay has a strong regional presence in the northeast and our S&W brand has been
a recognizable brand on the west coast for over 80 years.
Government
Regulation
Our
coffee roasting operations are subject to various governmental laws and regulations, which require us to obtain licenses relating to
customs, health and safety, building and land use and environmental protection. Our roasting facility is subject to state and local air-quality
and emissions regulation. If we encounter difficulties in obtaining any necessary licenses or if we have difficulty complying with these
laws and regulations, then we could be subject to fines and penalties, which could have a material adverse effect on our profitability.
In addition, our product offerings could be limited, thereby reducing our revenues.
We
believe that we are in compliance in all material respects with all such laws and regulations and that we have obtained all material
licenses and permits that are required for the operation of our business. We are not aware of any environmental regulations that have
or that we believe will have a material adverse effect on our operations.
Employees
We
have 96 full-time employees. None of our employees are represented by unions or collective bargaining agreements. Our management believes
that we maintain good working relationships with our employees. To supplement our internal sales staff, we sometimes engage independent
national and regional sales brokers as independent contractors who work on a commission basis.
ITEM 1A. RISK FACTORS
An
investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with all of the other information included in this report. In addition
to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market
price of our common stock could decline due to any of these identified or other risks, and you could lose all of your investment.
Risks
affecting our Company
Because
our business is highly dependent upon a single commodity, coffee, any decrease in demand for coffee could materially adversely affect
our revenues and profitability. Our business is centered on essentially one commodity: coffee. Our operations have primarily
focused on the following areas of the coffee industry:
● the roasting, blending, packaging and distribution of private label coffee;
● the sale of wholesale specialty green coffee.
Demand
for our products is affected by:
● consumer tastes and preferences;
● global economic conditions;
● demographic trends; and
● the type, number and location of competing products.
Because
we rely on a single commodity, any decrease in demand for coffee would harm our business more than if we had more diversified product
offerings and could materially adversely affect our revenues and operating results.
Unfavorable
global economic conditions and adverse developments with respect to financial institutions and associated liquidity risk could adversely
affect our business, financial condition and stock price.
The
global credit and financial markets are currently, and have from time to time experienced extreme volatility and disruptions, including
severely diminished liquidity and credit availability, rising interest and inflation rates, declines in consumer confidence, declines
in economic growth, increases in unemployment rates and uncertainty about economic stability. The financial markets and the global economy
may also be adversely affected by the current or anticipated impact of military conflict, including the ongoing conflict between Russia
and Ukraine, terrorism or other geopolitical events. Sanctions imposed by the United States and other countries in response to such conflicts,
including the one in Ukraine, may also adversely impact the financial markets and the global economy, and any economic countermeasures
by the affected countries or others could exacerbate market and economic instability. There can be no assurance that future credit and
financial market instability and a deterioration in confidence in economic conditions will not occur. Our general business strategy may
be adversely affected by any such economic downturn, liquidity shortages, volatile business environment or continued unpredictable and
unstable market conditions. If the equity and credit markets deteriorate, or if adverse developments are experienced by financial institutions,
it may cause short-term liquidity risk and also make any necessary debt or equity financing more difficult, more costly, more onerous
with respect to financial and operating covenants and more dilutive. Failure to secure any necessary financing in a timely manner and
on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require
us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, financial
institutions, manufacturers and other partners may be adversely affected by the foregoing risks, which could directly affect our ability
to attain our operating goals on schedule and on budget.
Adverse
global conditions, including economic uncertainty, may negatively impact our financial results.
Global
conditions, dislocations in the financial markets, any negative financial impacts affecting United States corporations operating on a
global basis as a result of tax reform or changes to existing trade agreements or tax conventions, or inflation, could adversely impact
our business in a number of ways, including longer sales cycles, lower prices for our products, reduced licensing renewals, customer
disruption or foreign currency fluctuations.
In
addition, the global macroeconomic environment could be negatively affected by, among other things, the COVID-19 pandemic or other epidemics,
instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global
credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the United Kingdom
from the European Union, the Russian invasion of Ukraine and the resulting prolonged conflict and other political tensions, and foreign
governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and
in global financial markets.
If
we are unable to geographically expand our branded and private label products, our growth will be impeded which could result in reduced
sales and profitability. Our business strategy emphasizes, among other things, geographic expansion of our branded and private
label products as opportunities arise. We may not be able to implement successfully this portion of our business strategy. Our ability
to implement this portion of our business strategy is dependent on our ability to:
● market our products on a national scale;
● increase our brand recognition on a national scale;
Our
sales and profitability may be adversely affected if we fail to successfully expand the geographic distribution of our branded and private
label products. In addition, our expenses could increase and our profits could decrease as we implement our growth strategy.
If
our hedging policy is not effective, we may not be able to control our coffee costs, we may be forced to pay greater than market value
for green coffee and our profitability may be reduced. The supply and price of coffee beans are subject to volatility and are
influenced by numerous factors which are beyond our control. We have used and expect to continue to use to a lesser extent short-term
coffee futures and options contracts for the purpose of hedging the effects of changing green coffee prices. In addition, we have acquired
and expect to continue to acquire to a lesser extent futures contracts with longer terms, generally three to four months, for the purpose
of guaranteeing an adequate supply of green coffee. Realized and unrealized gains or losses on options and futures contracts are reflected
in our cost of sales. Gains on options and futures contracts reduce our cost of sales and losses on options and futures contracts increase
our cost of sales.
The
use of these derivative financial instruments has generally enabled us to mitigate the effect of changing prices. However, no strategy
can entirely eliminate pricing risks and we generally remain exposed to losses on futures contracts when prices decline significantly
in a short period of time, and we would generally remain exposed to supply risk in the event of non-performance by the counterparties